Sunday, March 13, 2011

Mythical big6 Price War

I swear most authors must not play 'game theory.' Why? If they did, we wouldn't ever hear a variation of this in the comments of JA Konrath's blog:

" what will happen to indie authors when the big brand authors and publishers finally do wake up (which they surely will do eventually) and start pricing their books at $4.99, $3.99, $2.99 and so on? When readers can get Lee Child, Harlan Coben and Tess Gerritsen for those prices, will they be so willing to take a punt on an self-published writer? In other words, can indies still be successful when their books are no longer a bargain compared to the mainstream?"

By Tom H.

"Game Theory" is when a strategy is proposed and you play the opposite as effectively as you can. Try dozens, hundreds, even thousands of scenarios to see what marketing strategy works.

So let's pretend publishers started to drop prices. Not to one price, but to $4.99, $3.99, and $2.99.

First, let us list the advantages of the big publishers:1. Shelf space in booksstores and big-box retailers2. Name recognition3. 'Aura of respectability.'4. Processes that generally produce an excellent product

Their disadvantages:1. Costs2. Speed (too many meetings/decisions/revisions)3. Dependence on shelf space in the bookstores4. Limited variety in the product

So we're pretending the publishers do an extended price war. The consequences:1. Bookstores are undercut on price. Just as e-readers/tablets/cell phones are becoming common place2. Permanent devaluation of ebooks. If ebooks become common at $4.99, forget taking the price back up to $9.99. This will make the publishers pine for the days of the > $9.99 protests.3. Indie authors seek refuge in the two areas they can: A. $0.99 ebooks B. Continuing to publish variety

I suspect one reason publishers do very well is that every time a potential customer sees a cover, they consider buying the pbook/ebook. Sharply discounted ebooks by the big6 will pull a large variety of readers out of the bookstores to the ereaders. Do publishers really want to give up the bookstore advantage sooner than they have to?

This also throws the publishers into a 'bazaar' environment. Note: I mean bazaar as in the chaotic marketplace: http://en.wikipedia.org/wiki/Bazaar

Would they really want to compete without a storefront advantage? Their 25% of 70% (17.5%) wouldn't look very good to any established author. recall, a true long term price war would devastate the print book scene. If you doubt that, consider why the publishers *raised* ebook prices over the last year. Why would they have protected the print market at the expense of market share in the emerging market?

Now what happens to Indie authors if there is a long price war?

Advantages:1. More customers of ebooks2. News coverage of the ebook price war3. Some sales to "support the under-dog."

But how many Indie authors are full time Indie authors? Their income wouldn't go to zero. Some would remain in the top 100 on Amazon... If the ebook market grew 6X, their income wouldn't go down a penny at $0.99 (as JA Konrath has already noted).

Some would see a drop in income. Perhaps 20% to 60%. :( But most indie authors could ride that out. They're not a corporation with high fixed expenses. Many would have to go back to full time 'at the 2nd job.' While frustrating... they wouldn't die off and they wouldn't stop producing new works.

Now take the big6. They would lose print revenue substantially. Perhaps 30% to 50% within 18 months! Suddenly print would lose 'economy of scale.' We would see a permanent increase in the price of print books as the efficiencies of ink on paper would plummet.

They would also be making less per ebook. Less than the print revenue. At some point their high fixed costs (leases, executive salaries/bonuses) would bury them.

I ignored a small number of big6 publishers participating in a price war. We've already seen discounting of individual books. It would take an across the board push to have any impact on Indie authors. So anything less than an extreme price war would just be noise.

Since the big6 publishers would lose a price war, they won't start it. I doubt we'll see the end of $2.99 to $9.99 ebook novels. They might not be in the top 100, but they'll bring in quite a bit of cash.

In my opinion, Indie authors and small publishers are far too established in ebooks to be kicked out of the market. There has been a permanent loss of market share to the 'little guys.'

So do the publishers choose:1. Drop ebook prices to grow the ebook market at the expense of the print market.2. Keep up prices to maintain their print book advantage?

Or put another ways:1. Do Indie authors have their share growth slow of a fast growing market?2. Do Indie authors have their share grow quickly of a mid-paced growth market?

5 comments:

Good analysis. I tend to agree that publishers will be reluctant to start a price war. They would do better by learning how to create a brand and leverage it online. I am sure there are some smart people in the traditional publishing world thinking about how to do just that and at some point, someone will make a move.

Perhaps the most likely outcome for the Big6 is consolidation. As volume declines and they lose economies of scale on the printing side, then there will be pressure to bring more books under fewer roofs in order to either preserve printing efficiencies or at least mitigate the unit cost increases.

If mergers and acquisitions are in the future for publishers, the Big6 may turn into the Big3. Not sure what all of the implications are of that scenario, but those more familiar with the nuts and bolts of the industry can comment.

It is likely that M&A won't occur until much more pain is felt and it will be the management teams that have access to capital who will be the acquirees (as opposed to being acquired). Given the rapidly growing importance of ebooks, it will take senior management that is visionary and has a constructive plan for how to integrate ebooks with pbooks that will be the winners.

Don't the Big 6 already use the same set of actual printers, i.e. aren't there a couple/few big printers to which the Big 6 contract out the physical/printing part of the book production process? The efficiencies are more likely to be seen in the administrative departments, marketing departments, and editorial staff--if my assumption is correct.

Also, I think the access to capital is critical. Even before the current crisis in Japan and its effects on markets, we were seeing some retrenching on the stock markets around the world. These times make it nearly impossible to access capital.

So mergers are quite likely.

My concern for indie authors and small, independent publishers is that there are still going to be relatively few distribution outlets for their product -- Amazon, Apple, perhaps a handful of other ereader stores, the current POD and small-press outfits -- and the overwhelming reliance on the e-distribution outlets could lead to some heavy handed tactics on the part of those distribution outlets, who are really going to be holding all the cards, much as NY publishing held all the cards, where mass market books were concerned, over the past 30-50 years.

As long as big publishers are protecting print, they won't engage in a price war on ebooks. I think the concern is what happens after they ditch print? A few publishers have already started in this direction, especially the romance imprints. If they don't, others will. Amazon is already a publisher as well as a distributer. B&N and Google could easily follow suite.

They can use their considerable capital to do the kind of publicity that individual authors can't. If digital coop goes up for sale, this combo could crush indies.

I 100% agree. As long as the big6 are big into print, they will not engage in an ebook price war.

By the time they ditch print, I doubt they could afford an ebook price war.

As to coop, I agree it will grow. Grrr... However, Amazon does better than its competitors by offering recommendations that customers really want to buy. How far are they willing to go? I suspect not nearly as far as the Ibookstore or B&N.

Azarimba,I share the concern about few distribution channels. However, that is only an issue if one company is truly dominant and has no reason to fear rapid market share erosion. Right now, there is no one company secure enough in ebook market share to be stupid for too long.

e.g., we should consider why Kindle outsells the iBookstore on iOS devices...

Since Android is now #1 on smartphone market share, we can expect an Amazon/Google slug fest just for that market share. IMHO that is the major battle for *new* ebook readers and will shape the market.

Having a multi-way competition will only be good for the consumer.

Strong ebook companies:AmazoniBookstoreB&N

Potentially strong ebook stores:KoboGoogle

And ebooks just haven't taken off outside of the English market... There is quite an opportunity to be tapped. :)

About Me

I love to parent, read, ski, travel, and scuba dive. I've switched from blogging about real estate to ebooks. As much of an optimist as I've been on ebooks, their growth is typically better than my predictions! My main prediction is 50% ebook market share by end of January 2013.
Any of my charts may be re-used with just a link to this blog (blog or specific post is up to whomever borrows the graphs).
Neil